Is Now a Good Time to Sell Your Marketing Company?

More than a few owners of marketing service companies are wondering if now is a good time to either sell their company or raise capital. Given the countless number of factors that must be considered when going to market, the short answer is "it depends." That said, there are three definite considerations for owners in any transaction:

(1) the current level of interest from buyers and the investment community
(2) the current valuation ranges relative to previous multiples and future estimates
(3) the reasons the company's owner or owners are considering a transaction.

Here's a quick analysis of the marketplace today.

There Is Interest
Gauging the level of interest in the marketplace is fairly straightforward. It's easy enough to pick the figurative brains of any number of institutional and strategic investors. It's even easier to secure useful data that's available on particular sectors. So what is the data telling us right now about marketing services companies?

Berkery Noyes' Full Year 2011 Trend Report research noted a 35% increase in deal volume from 2010 to 2011 for the sector. This robust level of activity is a result of the significant amounts of cash held by operating companies, reportedly over $2 trillion, as well as a desire on their part to enhance revenue growth and facilitate the transition of any legacy businesses through acquisition.

Strategic buyers/investors are looking at acquisitions and investments to either fill or enhance a product or service void in their offering. Publicis Groupe, for example, a French multinational advertising and communications company, agreed to purchase Rosetta Marketing Strategies in May 2011 for $575 million, or 2.7 times 2010 revenues. Prior to announcing this transaction, Publicis had publicly stated that its goal was to increase revenue derived from digital marketing from 28% in 2010 to 35% over the following three-year period. This transaction, which was completed with cash reserves, brings Publicis closer to its stated objective and highlights the ability of operating companies to fund acquisitions.

Publicis was the most active acquirer in the space for 2011 with 22 announced deals, including the purchase of 51% of Big Fuel, a New York-based social media marketing agency. In addition to digital and shopper marketing, social media is an area of particularly strong interest. The purchase of BzzAgent for $60 million in May 2011 by dunnhumby, a retail analytics company, is another example of an operating company's desire to buy versus building internally.

Point being, the data is telling us there is extraordinary interest for marketing services companies right now. And so are folks who matter in and around the industry. I've had dialogues with over 80 financial investors and 60 strategic acquirers in the last few months, and one point stands out above the rest: there is definitive interest in the sector from strategic and financial investors/buyers. Operating companies have the cash on hand and are very comfortable pursuing both investments and acquisitions.

The Numbers Look Good
Berkery Noyes calculates the median revenue multiple for marketing services acquisitions has increased from 1.0x in 2010 to 1.3x in 2011. At the same time, the median EBITDA multiple has increased from 7.5x in 2010 to 9.9x in 2011. Beyond this improvement in multiples, it's reasonable to think that companies in this space will further benefit from increased efficiencies emerging out of significant technological advancements.

The Timing Might Be Right
So, what are some of the reasons for considering a transaction? One is often that the primary shareholder has reached a certain point in life and simply wants to diversify. In this scenario, the primary shareholder retains the leverage in any negotiation since he or she is not being forced to put the company on the market. Another big reason to consider a transaction is when a company has identified a strategic acquisition and needs additional capital to fund the purchase. Again, the company is not being forced into the transaction and retains the leverage in any negotiation.

Then there's the scenario where the company's lenders are exerting pressure to bring in additional equity. In this case, leverage has shifted to the new capital providers.

We say all this because many sellers do not realize that leverage, along with attributes such as size, profitability, lines of business, customer base, and the percentage of the company being sold, are very important factors in determining an acquisition multiple. In transaction scenarios where the seller has maintained the leverage, the buyer will have to pay a clearing price to win the deal.

When leverage shifts away from the seller, however, as in the scenario we described above, the challenge is to aggregate multiple buyers/investors for the company to generate the highest price (valuation) possible. To that end, companies should always be looking ahead 12-24 months, especially when there is a maturity date looming for any outstanding debt.

One way or the other, aggressively pursuing appropriate transactions when the leverage is in the company's favor will almost always result in a more successful transaction.

Altogether, there are plenty of interested buyers/investors with money and valuations are relatively high. So, is now the time to go to market with your marketing company? If you're a marketing company owner considering a transaction—and you can affect that transaction on your terms—we would suggest the answer is most definitely yes.

Evan Klein is managing director of Berkery Noyes & Co.